US Manufacturing PMI Hits Four-Year High in July

US manufacturing activity surged to its highest level in more than four years in July, driven by strong order growth and boosting employment despite supply chain strains from the Middle East conflict.

The Institute for Supply Management (ISM) reported that its manufacturing PMI increased to 55.6 last month, the highest reading since May 2022, up from 53.3 in June. Economists polled by Reuters had forecast the PMI would edge up to 54.0.

The surge in activity has been supported by businesses front-loading orders to avoid higher prices and shortages stemming from the U.S.-Israeli war with Iran, as well as an artificial intelligence buildout driving activity in the technology sector. The Federal Reserve reported last month that factory production grew at its fastest pace in four years in the second quarter.

Strong demand has prompted factories to boost employment, with the measure of manufacturing employment rebounding to 52.8, the highest level since August 2022. However, supply constraints have kept input costs elevated, with inflation at the factory gate remaining high despite a slight slowdown in the pace of increase.

The Federal Reserve last week left its benchmark overnight interest rate in the 3.50%-3.75% range, though three members of the policy-setting committee dissented, preferring a quarter-percentage-point hike. Inflation risks are tilted to the upside because of the ongoing war, which is now in its sixth month.

The U.S. services sector maintained a strong pace of growth in July as an acceleration in new orders was offset by higher prices for inputs and a decline in employment. The ISM's nonmanufacturing purchasing managers index inched up to 54.1 last month from 54.0 in June.

The survey's measure of new orders received by services businesses jumped to 57.2 from 55.1 in June, likely related to ongoing front-loading as businesses try to avoid shortages and higher prices from the Middle East conflict. Strong orders suggest that domestic demand retained its robust pace of growth early in the third quarter.

The survey's measure of supplier deliveries slipped to 52.8 from 54.4. A reading above 50 indicates slower deliveries, which are contributing to higher prices for inputs. The survey's measure of prices paid by businesses for inputs increased to 70.3 from 67.7 in June.

The survey's employment sub-index dropped to 47.4 from 51.2 in June, contracting in four of the last five months and not being a good predictor of services sector payrolls in the government's closely watched employment report.